# Some level below capacity in addition the unfavorable

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some level below capacity. In addition, the unfavorable production-volume variance may not represent a feasible cost savings associated with lower capacity. Even if Dawn could shift to lower fixed costs by lowering capacity, the fixed cost may behave as a step function. If so, fixed costs would decrease in fixed amounts associated with a range of production capacity, not a specific production volume. The production-volume variance would only accurately identify potential cost savings if the fixed cost function is continuous, not discrete.
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4. The static-budget operating income for February is: Revenues \$55 × 1,000 \$55,000 Variable costs \$25 × 1,000 25,000 Fixed overhead costs 9,000 Static-budget operating income \$21,000 The flexible-budget operating income for February is: Revenues \$55 × 600 \$33,000 Variable costs \$25 × 600 15,000 Fixed overhead costs 9,000 Flexible-budget operating income \$ 9,000 The sales-volume variance represents the difference between the static-budget operating income and the flexible-budget operating income: Static-budget operating income \$21,000 Flexible-budget operating income 9,000 Sales-volume variance \$12,000 U Equivalently, the sales-volume variance captures the fact that when Dawn sells 600 units instead of the budgeted 1,000, only the revenue and the variable costs are affected. Fixed costs remain unchanged. Therefore, the shortfall in profit is equal to the budgeted contribution margin per unit times the shortfall in output relative to budget. = × = (\$55 – \$25) × 400 = \$30 × 400 = \$12,000 U In contrast, we computed in requirement 2 that the production-volume variance was \$3,600U. This captures only the portion of the budgeted fixed overhead expected to be unabsorbed because of the 400-unit shortfall. To compare it to the sales-volume variance, consider the following: Budgeted selling price \$ 55 Budgeted variable cost per unit \$25 Budgeted fixed cost per unit (\$9,000 ÷ 1,000) 9 Budgeted cost per unit 34 Budgeted profit per unit \$ 21 Operating income based on budgeted profit per unit \$21 per unit × 600 units \$12,600 8-44
The \$3,600 U production-volume variance explains the difference between operating income based on the budgeted profit per unit and the flexible-budget operating income: Operating income based on budgeted profit per unit \$12,600 Production-volume variance 3,600 U Flexible-budget operating income \$ 9,000 Since the sales-volume variance represents the difference between the static- and flexible-budget operating incomes, the difference between the sales-volume and production-volume variances, which is referred to as the operating-income volume variance is: Operating-income volume variance = Sales-volume variance – Production-volume variance = Static-budget operating income – Operating income based on budgeted profit per unit = \$21,000 U – \$12,600 U = \$8,400 U. The operating-income volume variance explains the difference between the static-budget operating income and the budgeted operating income for the units actually sold. The static- budget operating income is \$21,000 and the budgeted operating income for 600 units would have been \$12,600 (\$21 operating income per unit 600 units). The difference, \$8,400 U, is the